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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Differential analysis for further processing

The management of Dominican Sugar Company is considering whether to process further raw sugar into refined sugar. Refined sugar can be sold for $2.20 per pound, and raw sugar can be sold without further processing for $1.40 per pound. Raw sugar is produced in batches of 42,000 pounds by processing 100,000 pounds of sugar cane, which costs $0.35 per pound of cane. Refined sugar will require additional processing costs of $0.50 per pound of raw sugar, and 1.25 pounds of raw sugar will produce 1 pound of refined sugar.

Instructions

1.    Prepare a differential analysis as of March 24 to determine whether to sell raw sugar (Alternative 1) or process further into refined sugar (Alternative 2).

2.    Briefly report your recommendations.

a)

To determine

Differential Analysis: Differential analysis refers to the analysis of differential revenue that could be gained or differential cost that could be incurred from the available alternative options of business.

To Prepare: The differential analysis of Company DS as on March 24 to decide whether to sell Raw Sugar or process it further to Refined Sugar.

Explanation

The differential analysis of Company DS as on March 24 for the given alternatives is shown below.

Differential Analysis of Company DS
Sell Raw Sugar (Alt. 1) or Process Further to Refined Sugar (Alt. 2)
March 24
Sell Raw Sugar   (Alternative 1)  Process Further to Refined Sugar (Alternative 2) Differential Effect on income
Revenues, per batch (1)        $58,800 (2)        $73,920 $15,120
Costs, per batch (3)  (-)  $35,000 (4)  (-)  $56,000 (-)  $21,000
Income (loss), per batch $23,800 $17,920 (-)  $5,800

 Table (1)

The differential analysis of Company DS as on March 24 shows that selling refined sugar may cause a decrease in income by $5,800; hence Raw Sugar should be sold without processing it further.

Working Note:

Calculate the revenues per batch from sale of raw sugar.

Revenue per batch  = $1.40 × 42,000 pounds= $58,800

(1)

Calculate the revenues per batch from processed refined sugar

b)

To determine

To Report: The recommendations for Company DS.

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